Can I claim a tax deduction for rent-to-own housing payments?

This is an interesting situation! For your payments to qualify for a mortgage interest deduction, there needs to be a legally binding agreement that actually transfers an ownership interest to you. A simple rent-to-own agreement might not qualify without proper documentation. For tax purposes, the IRS looks at the substance of the arrangement rather than what you call it. If this is truly a rent-to-own (also called a lease option or lease purchase), then: 1. The rent portion is generally not deductible for you (rent on a personal residence isn't deductible). 2. If a portion clearly represents interest on a purchase loan, it might be deductible as mortgage interest, but only if the agreement is properly structured as a legitimate purchase contract with a security interest in the property. I'd recommend getting this arrangement formalized with proper legal documentation that clearly distinguishes between the rent portion and the purchase portion. Without that, the IRS would likely consider the entire payment as non-deductible rent.

I went through something similar with my parents last year and discovered taxr.ai (https://taxr.ai) which really helped clarify our situation. We had a handwritten agreement that I wasn't sure would stand up to IRS scrutiny, and I was worried about claiming deductions. Their document analyzer looked at our agreement and highlighted exactly what we needed to fix to make it valid for tax purposes. They also explained that in a true rent-to-own situation, you need to clearly separate what portion is rent (not deductible) and what portion goes toward equity or interest (potentially deductible if structured correctly). My parents and I were able to redraft our agreement based on their recommendations, and I felt much more confident about my tax filing afterward.

I need to follow up about my experience with taxr.ai. After my initial skepticism, I decided to try it with our informal rent-to-own agreement with my sister. The analysis was surprisingly thorough! It identified that our arrangement had been missing several key elements the IRS looks for, particularly the computation method for interest and principal portions of each payment. We redrafted our agreement following their guidance, making it much more formal and specific about what portion of my monthly payments counts as interest. I was even able to claim a mortgage interest deduction for the last tax year which saved me around $2,100. The best part was having confidence that our agreement would stand up to scrutiny if questioned. If you're in any kind of family property arrangement like this, I definitely recommend getting it analyzed properly.

I had a similar situation with my aunt a few years back. After months of trying to reach the IRS to get clarity (busy signals, disconnects, endless holds), I found Claimyr (https://claimyr.com) which got me through to an actual IRS agent in about 15 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent explained that for rent-to-own agreements to qualify for mortgage interest deductions, there are specific requirements: 1) The agreement must clearly state the purchase price, 2) A portion of each payment must be explicitly allocated to principal and interest, and 3) The agreement must transfer equitable title to you. Without these elements, the IRS typically treats the entire payment as non-deductible rent. The agent was super helpful and even emailed me some reference materials afterward. Saved me hours of frustration and probably prevented an audit situation.

I have to admit I was completely wrong about Claimyr. After dismissing it in my earlier comment, my tax situation got more urgent when I received a notice from the IRS about an issue with my family's property arrangement. After spending two full days trying to reach someone at the IRS (literally 6+ hours on hold only to get disconnected twice), I finally gave Claimyr a try out of desperation. I was connected to an IRS agent within 20 minutes, and they helped resolve my issue in a single call. The agent confirmed that our informal family property agreement wasn't properly structured for tax deductions and explained exactly what documentation we needed to fix it. This saved me from potentially claiming deductions incorrectly and facing penalties later. I'm now working on properly documenting our arrangement based on their guidance. Sometimes paying for convenience is actually worth it when dealing with government bureaucracy!

One thing nobody has mentioned yet - you need to check your local laws about rent-to-own arrangements. In some states, these agreements have specific legal requirements to be valid. For example, in my state, rent-to-own agreements for real estate must specify: - The total purchase price - What percentage of each payment applies to the purchase - The exact terms for exercising your option to buy - The deadline for when you must decide to purchase Without these elements, local courts might not recognize your agreement, which can also affect how the IRS views it for tax purposes. My brother got burned on this exact situation because their agreement was too informal.

Just want to point out that this arrangement could also affect your in-laws' taxes in ways they might not realize. When they eventually transfer the property to you, they might face capital gains tax implications depending on how the sale is structured. Also, if they're charging you below-market interest rates (which is common in family arrangements), there could be "imputed interest" issues where the IRS treats the transaction as if a market rate was charged, even if it wasn't. Your in-laws should definitely consult with a tax professional about this. My parents did something similar with my brother and ended up with unexpected tax consequences when they formally transferred the property years later.

I'm dealing with a similar situation with my parents and wanted to share what I learned from my CPA. The key issue is that for the IRS to recognize this as anything other than rent, you need to establish "equitable title" - basically proving you have a real ownership interest that goes beyond just a promise to sell later. My CPA explained that true rent-to-own arrangements for tax purposes require: 1) A clear purchase price stated upfront, 2) Specific allocation of each payment between rent and purchase equity, 3) A definite purchase timeline, and 4) evidence that you're building actual equity (not just credits toward a future purchase). Without these elements, the IRS typically treats it as a lease with an option to purchase, meaning no mortgage interest deduction for you. The tricky part is that even if you formalize the agreement now, the IRS looks at the substance of what actually happened during those past 2 years of payments. I'd strongly recommend getting both a real estate attorney AND a tax professional involved to review your situation. Family property deals can get messy fast if not done right, both legally and tax-wise.